Portugal

   

Economic Policies

#30
Key Findings
Despite significant gains as it emerges from austerity, Portugal scores comparatively poorly overall (rank 30) with respect to economic policies. Its score on this measure has improved by 1.7 points relative to its 2014 level.

The Costa government has continued its strategy of gradually reversing past austerity measures without undermining budgetary policy or fiscal consolidation. Growth levels have been low to moderate but consistently positive for years.

Unemployment rates have fallen steadily, reaching 6.6% in late 2018, down more than two points in a year. These gains have been driven both by economic growth and emigration. Youth unemployment rates remain worryingly high. The minimum monthly wage has been steadily increased.

Income and consumption taxes remain high as a means of furthering budget consolidation. Deficits have been brought to moderate levels, prompting credit-rating agencies to restore the country’s investment-grade rating. Debt levels remain very high, but have begun to decline as a share of GDP. The country’s tech-startup scene is gaining international attention.

Economy

#28

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
7
In a country marked by considerable policy discontinuities across governments, the stability of the Costa government has helped foster and maintain a reasonably reliable economic environment, at least in contrast to the 2015 and 2016 periods.

The government has maintained its strategy of gradually reversing previous austerity measures without generating adverse impacts on budgetary policy or the country’s overall fiscal consolidation. It has also sought to facilitate investment through the SIMPLEX+ program, which aims to simplify bureaucratic processes.

The economy grew during the period under review. Quarterly economic growth rates for 2018 were 0.4% in the first quarter and 0.6% in the second quarter. Eurostat has provided a provisional annual growth rate of 2.8% in 2017, up from 1.9% in 2016. For 2018, the European Commission has estimated a growth rate of 2.2%.

After three years of economic downturn (2011 – 2013), 2017 marked the fourth consecutive year of economic growth. Moreover, economic growth has also improved in relation to EU and euro zone averages. While the economy grew in 2014 and 2015, it did so at a lower rate than the EU-28 and euro zone averages. In 2016, economic growth in Portugal was equal to the euro zone average and 0.1 percentage points below the EU-28 average, but the 2.8% growth rate for 2017 exceeds both the EU-28 and euro zone averages (2.4% in both instances).

At the same time, there are some notes of caution. First, the estimates for 2018 and 2019 point to a slowing down of economic growth, and an economy that is not converging with the EU and euro zone averages.

Second, and most salient, the Portuguese economy still faces a number of structural constraints that remain largely unaddressed by government policy during this period. As the Bank of Portugal noted in March 2018: “In Portugal, structural weaknesses persist, which cannot be ignored, reflecting various challenges (demographic, technological and institutional) to potential growth in the Portuguese economy.”

Citations:
European Commission, “Economic performance and forecasts,” available online at: https://ec.europa.eu/info/business-economy-euro/economic-performance-and-forecasts_en

Eurostat, “Real GDP growth rate – volume: Percentage change on previous year” available online at: https://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=tec00115&plugin=1

Eurostat, “Gross domestic product, volumes: Percentage change q/q-1 (SCA)” available online at: https://ec.europa.eu/eurostat/tgm/refreshTableAction.do?tab=table&plugin=1&pcode=teina011&language=en

Banco de Portugal [Bank of Portugal], “Projections for the Portuguese economy: 2018-20” (March 2018), available online at: https://www.bportugal.pt/sites/default/files/anexos/pdf-boletim/proj_mar2018_e.pdf

Labor Markets

#24

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
7
Unemployment rates maintained the downward trajectory identified in the last four reports. According to Eurostat, Portugal’s general unemployment rate was 6.6% in September 2018, a drop of almost two percentage points relative to October 2017. This was the lowest such rate since September 2002. The unemployment rate has fallen consistently since its peak of 17.9% in January 2013. It is also back in single-digit territory – the norm for the low wage, low unemployment Portuguese economy – since April 2017, after more than eight years of double-digit unemployment, beginning in February 2009.

However, this decline has not been entirely due to labor-market policies. The available evidence suggests that two main factors have driven the phenomenon. The first is the return to real economic growth after a period of contraction between 2011 and 2013. The second is the continued effect of very high levels of emigration. The most recent data for 2017, produced by the National Statistics Institute (Instituto Nacional de Estatística, INE) and provided by Pordata, indicates that some 81,051 people emigrated (on either a permanent or temporary basis) in 2017. This is still a very high number, although maintaining a downward trajectory since 2014 (when it reached some 135,000). While emigration numbers are falling, they remain very high. The number is all the more relevant if we consider that, according to Eurostat, the absolute number of unemployed people declined by a quantity that closely mirrors the emigration statistics, with the number of unemployed people falling by 110,000 in 2017.

As in the previous period, youth unemployment remains a blot in the generally positive development of the labor market. Youth unemployment declined at a much slower rate than overall unemployment, from 24.6% in October 2017 to 19.6% in September 2017, well above the euro zone average of 16.8%. The relative stickiness shown by youth unemployment is consistent with the analysis that labor market policies have not been wholly responsible for the decline in unemployment.

The monthly minimum wage saw a €23 increase to €580 in 2017. This marks the fourth consecutive year of increases in the minimum wage, after a four-year plateau at €485 during the bailout period (2011 – 2014). Unlike the 2016 increase, however, this increase did not have the support of business associations. Yet, in practice, this increase does not appear to have had a negative effective on the labor market.

The government of Portugal passed and published a new labor code in March 2018. The impact of the new code, of course, remains to be seen at this early date.

Citations:
Eurostat, “Unemployment rate by sex and age – monthly average.”

Eurostat, “Harmonised unemployment rates (%) – monthly data.”

Pordata, “Emigrantes: total e por tipo – Portugal,” available online at: http://www.pordata.pt/Portugal/Emigrantes+total+e+por+tipo-21

Pordata, “Salário mínimo nacional,” available online at: https://www.pordata.pt/Portugal/Salário+m%C3%ADnimo+nacional-74

cite.gov.pt/pt/legis/CodTrab_indice.html

Taxes

#33

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
5
The very high levels of taxation on income and consumption noted in the previous SGI reports have remained in this period.

Overall, the tax burden increased to 34.7% of GDP in 2017, the highest level since the National Statistics Office (Instituto Nacional de Estatística) began compiling data in 1995.

This high level is a result of two factors.

First, while the Costa government has stated its intention to end austerity, it largely retains the income tax brackets approved in 2013, which generated a massive tax increase (and which boosted the tax burden from 31.8% of GDP in 2012, below the OECD average, to 34.1% of GDP in 2013, above the OECD average). Prior to this change in income tax, the tax burden had only once surpassed 32% (32.3% in 2011). Since 2013, it has never fallen below 34% of GDP.

Second, the Costa government has also sought to maintain budgetary consolidation despite increasing expenditure. To that end, it has resorted to indirect taxation, either maintaining existing high levels on some indirect taxes (e.g., VAT) or increasing the rate on other indirect taxes (e.g., on fuel and cars, particularly in 2016 but also in 2017 and 2018).

Overall, tax policy has failed to achieve horizontal and vertical equity during the period under review.

Fiscal receipts continue to rely excessively on more regressive indirect taxation. Thus, while the share of direct taxation on the overall tax burden in Portugal (29.6%) is below the EU-28 average (34.2%) in 2017, the share of indirect taxation in Portugal (43.5%) is well above the EU average (34%). Moreover, the overall balance is one where indirect taxation outweighs direct taxation, in contrast to the EU norm. The considerable dependence of public finances on indirect taxation measures (e.g., VAT) fails to satisfy the vertical-equity criterion.

The tax authority continued to implement measures to combat tax avoidance in 2017 and 2018, and approved a new strategic plan to combat fraud and tax evasion for the 2018 – 2020 period. However, as its own report noted, the tax authority was unable to implement all the proposed measures for the 2015 – 2017 period, with some 20% not implemented.

Existing data suggests historically high levels of tax evasion and fraud in Portugal. Thus, a paper by Annette Alstadsætera, Niels Johannesen and Gabriel Zucman, published in 2018, indicated that over 20% of Portugal’s GDP was held offshore in 2007 – more than twice the world average of 9.8%, and second only to Greece in the European Union. While its various measures are a step in the right direction, the tax authority appears unable to deal fully with the accumulation of offshored wealth or sophisticated modes of tax evasion.

At the corporate level, the effective tax rate is well below the nominal rate due to tax deductions, meaning that comparatively profitable companies often pay low effective rates.

Citations:
Alstadsæter, A., Johannesen, N., & Zucman, G. (2018). Who owns the wealth in tax havens? Macro evidence and implications for global inequality. Journal of Public Economics, Volume 162, June 2018, Pages 89-100.

Eco (2018), “Grandes empresas pagaram mil milhões em impostos. Fisco só ficou com 10% dos lucros,” available online at: https://eco.pt/2018/04/18/grandes-empresas-pagaram-mil-milhoes-em-impostos-fisco-so-ficou-com-10-dos-lucros/

INE (2018),” Carga fiscal aumenta para 34,7% do PIB – 2017,” available online at: https://www.ine.pt/xportal/xmain?xpid=INE&xpgid=ine_destaques&DESTAQUESdest_boui=315155988&DESTAQUESmodo=2

Portuguese Republic (2017), “Relatório De Atividades Desenvolvidas – Combate à Fraude e Evasão Fiscais Aduaneiras 2017,” available online at: https://www.portugal.gov.pt/download-ficheiros/ficheiro.aspx?v=a2893ee2-ada7-4c16-9dc5-4c38eea47c8e

Budgets

#29

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
7
The budget deficit for 2017 stood at 3% of GDP. This is only the fourth time that the deficit has been at or below 3% since 1995 – with 2016 and 2017 accounting for two of these four years. However, this 3% deficit marks an increase vis-à-vis to 2016’s record low.

The 3% budget deficit in 2017 was inflated by a one-off capitalization of the public bank, Caixa Geral de Depósitos (CGD). Without this injection of capital into the CGD, the deficit would have stood at 0.9% – which would have been the lowest level since democratization.

These positive results have continued into 2018, with the independent Council of Public Finances estimating a deficit for 2018 of 0.5% – a result that is better than the government’s own forecasts.

The decrease in the budget deficit has affected public debt. While the absolute level of public debt remains very high, standing at 124.8% of GDP in 2017 (only lower than Greece and Italy in the European Union), this is a 4.3 percentage point improvement vis-à-vis 2016.

These positive results have helped Portugal regain international credibility, as evidenced on two levels. First, in terms of the evaluation of credit agencies. During the period under review, Portugal’s rating was raised to investment grade by all three big credit agencies, with Fitch raising the rating in December 2017 and Moody’s in October 2018. This marked the first time since July 2011 that Portugal had received an investment grade rating from all of the major credit agencies.

The second level is the increasing political recognition afforded to Portugal’s Minister of Finance, Mário Centeno. After being dubbed the “Cristiano Ronaldo of the Ecofin” in May 2017, Centeno was elected president of the Eurogroup by the finance ministers of euro zone member states in December 2017 – a result that is inevitably bound to Portugal’s improving budgetary consolidation.

While Minister of Finance Centeno enjoys a good reputation regarding budgetary matters both within and beyond Portugal, it should be noted that there are several so-called cativacoes within the budget which refer to funds that have been allocated but cannot be spent..

Citations:
Eco (2018), “Conselho das Finanças Públicas aponta para défice de 0,5% este ano, mas adia excedentes orçamentais,” available online at: https://eco.pt/2018/09/20/cfp-aponta-para-defice-de-05-este-ano-mas-adia-excedentes-orcamentais/

Econews (2018), “Portugal has the second highest government deficit in the Eurozone,” available online at: https://econews.pt/2018/10/22/portugal-has-the-second-highest-government-deficit-in-the-eurozone/

Eurostat, “General government gross debt – annual data,” available online at: http://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=teina225&plugin=1

Eurostat, “Government deficit/surplus, debt and associated data, available online at: http://appsso.eurostat.ec.europa.eu/nui/show.do?query=BOOKMARK_DS-416336_QID_F269EA3_UID_-3F171EB0&layout=TIME,C,X,0;GEO,L,Y,0;UNIT,L,Z,0;SECTOR,L,Z,1;NA_ITEM,L,Z,2;INDICATORS,C,Z,3;&zSelection=DS-416336NA_ITEM,B9;DS-416336INDICATORS,OBS_FLAG;DS-416336SECTOR,S13;DS-416336UNIT,PC_GDP;&rankName1=UNIT_1_2_-1_2&rankName2=SECTOR_1_2_-1_2&rankName3=INDICATORS_1_2_-1_2&rankName4=NA-ITEM_1_2_-1_2&rankName5=TIME_1_0_0_0&rankName6=GEO_1_2_0_1&sortC=ASC_-1_FIRST&rStp=&cStp=&rDCh=&cDCh=&rDM=true&cDM=true&footnes=false&empty=false&wai=false&time_mode=NONE&time_most_recent=false&lang=EN&cfo=%23%23%23%2C%23%23%23.%23%23%23

Público (2018), “Caixa faz défice de 2017 subir para 3%,” available online at: https://www.publico.pt/2018/03/26/economia/noticia/caixa-faz-defice-de-2017-subir-para-3-1808040

https://eco.pt/2018/10/16/centeno-nao-abre-mao-das-cativacoes-no-ultimo-oe/

Research, Innovation and Infrastructure

#23

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
6
Portugal’s rank in the World Economic Forum’s 2018 Global Competitiveness Index remained largely stable compared to the 2017 index, standing at 34 out of 140 countries in 2018, as opposed to 33 out 135 countries in the previous year. It also saw an improvement in its score vis-à-vis 2017. However, while Portugal’s score improved in three out of the four index components, it deteriorated in the innovation ecosystem component.

The European Union’s 2018 Innovation Scoreboard continues to classify Portugal as a “moderate innovator,” the second-lowest category (out of four). Moreover, it shows that Portugal’s position continued to decline in relation to the EU average in 2017. Thus, Portugal’s performance relative to the EU average in 2017 stood at 80%, a one percentage point decline compared to 2016 and five percentage points below 2010, when it stood at 85%.

Out of the 10 dimensions considered by the 2017 scoreboard, Portugal is above the EU average in three: attractive research systems, innovators and an innovation-friendly environment.

The government is placing a great deal of emphasis on research and innovation, with a particular interest in developing the tech sector. During the review period, Lisbon hosted the Web Summit (5 – 8 November 2018), the largest tech conference in the world, dubbed by Bloomberg the “Davos for geeks.” This conference followed the 2016 and 2017 editions, which were also held in Lisbon. Moreover, in October 2018, the government announced a deal that will keep the event in Lisbon until 2028, with a public investment of €110 million over the next 10 years.

This is beginning to have some impact. Lisbon continues to be seen as an attractive destination for startups and is ranked eighth in terms of preferred location by European founders in the 2017 State of European Tech Report. Likewise, the report places Portugal in the top 10 fastest-growing tech worker populations in Europe in 2017.

However, the 2017 State of European Tech Report also highlights the very low position from which Portugal is developing. Thus, consistent with the Innovation Scoreboard results, these tech results and initiatives are not yet percolating fully through to the general economy. The amount of capital invested in tech per capita in Portugal is $4, one of the lowest in the countries analyzed, and well below leading European countries such as Sweden ($123), Ireland ($111) or the UK ($59).

Citations:
Atomico & Slush (2017), “The State of European Tech 2017,” available online at: https://2017.stateofeuropeantech.com (published on 30 November 2017)

“European Innovation Scoreboard 2017 – Portugal.” Available online at: https://ec.europa.eu/docsroom/documents/23935/attachments/1/translations/en/renditions/native

“European Innovation Scoreboard 2018 – Portugal.” Available online at: https://ec.europa.eu/docsroom/documents/30696

World Economic Forum (2018), “Portugal: Global Competitiveness Index 4.0 – 2018 edition,” available online at: http://reports.weforum.org/global-competitiveness-report-2018/country-economy-profiles/#economy=PRT

Global Financial System

#38

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial System
5
Portugal is a peripheral country, which limits its ability to contribute to the effective regulation and supervision of the international financial architecture. Moreover, the risk associated with the country’s high deficits and public debt has led successive governments since the new millennium to focus overwhelmingly on achieving fiscal sustainability and financial stability, most notably during the 2011 – 2014 bailout period. In the post-bailout period, Portuguese governments have sought to play a bigger role in contributing to EU debates on regulation. Their effectiveness and role have been enhanced by Portugal’s status as a bailout “success story,” and further reinforced by the election of Minister of Finance Mário Centeno as president of the Eurogroup.

Citations:
Success story which enhances status as expert says in last sentence above is found in Liz Alderman, “Portugal Dared to Cast Aside Austerity. It’s Having a Major Revival,” New York Times “Business Day” July 23, 2018.
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